The days are numbered for the PayPal Money Market Fund.
PayPal parent eBay (Nasdaq: EBAY) will shut down the interest-bearing vehicle by the end of next month, as high costs to maintain meager interest-income disbursements are apparently no longer worth it for the marketplace specialist.
Accountholders won't have to do anything when the fund bites the dust. The money will simply be automatically transferred back into the traditional PayPal account balance.
The fund is yielding only a negligible 0.06%, and many PayPal users tend to withdraw their outstanding balances anyway, so this closure probably isn't going to be seen as a big deal. As big as PayPal is, there were only $471 million in assets in the fund as of last week. And running an interest-bearing service like this doesn't come cheap: PayPal was subsidizing most of the 0.87% expense ratio just to keep generating a positive return for its users.
At least PayPal can afford to simply throw in the towel. Charles Schwab (Nasdaq: SCHW) had to absorb more than $200 million in additional money-market management-fee waivers last year. Discount brokers can't afford to ignore the interest-bearing potential of idle balances, even if they don't market the services aggressively.
In other cases, payouts are dwindling. Four years ago, E*TRADE (Nasdaq: ETFC) rolled out its Max-Rate checking account. The discounter promoted the Web-based banking vehicle's 3.25% payout as yielding nine times the 0.36% national average. Today a Max-Rate account yields a mere 0.15%. That's better than nothing, even if the payout rate is nearly nothing.
PayPal doesn't have the competitive pressure one finds among banks and brokers, but that still doesn't mean a shutdown is the right decision. For starters, rates won't stay this low forever. It will be harder to get rolling again once the climate is more inviting.
And more importantly for PayPal, nixing the money market fund will encourage users to drain their accounts dry. At a technology conference four years ago, CEO-at-the-time Meg Whitman alluded to the importance of what was then more than $2 billion sitting in interest-generating PayPal accounts. The yield was much higher at the time, so a lot of people would just let incoming transactions sit in the fund. When they'd go shopping online and see the PayPal logo as a payment option, they'd then turn to their positive balances as found money. That's unlikely to happen now, even though PayPal itself is much larger.
It's true that PayPal will be sparing itself millions in operating costs. Getting past the tax paperwork will also make things easier. However, I don't think PayPal is fully aware of the future transactions that it will forgo as a result of this move.
Nixing interest goes both ways.
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